Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Lonestar enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future oil, NGL and natural gas production and related cash flows. The oil, NGL and natural gas revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for entering into these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future oil, NGL and natural gas sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.

Inherent in Lonestar's fixed price contracts are certain business risks, including market risk and credit risk. Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from non-performance by the Company’s counterparty to a contract. The Company does not currently require cash collateral from any of its counterparties nor does its counterparties require cash collateral from the Company.

The Company also used interest rate swap contracts to manage its net exposure to rate changes attributable to its Credit Facility borrowings.

In September 2020, the Company terminated and monetized all of its open commodity and interest rate swaps prior to its Chapter 11 bankruptcy filing (see Note 1. above), which resulted in a net realized gain of $30.5 million (comprised of $39.9 million for oil swaps, offset by negative $6.7 million for natural gas swaps and negative $2.7 million for interest rate swaps).

In October 2020, the Company entered into new natural gas swaps for January 2021 through December 2021, which hedge 10,000 MMBtu per day at an average price of $3.04 per MMBtu. The Company also entered into natural gas swaps for January 2022 through December 2022, which hedge 5,000 MMBtu per day at an average price of $2.70 per MMBtu. In November 2020, the Company entered into new crude oil swaps for December 2020, which hedge 4,000 barrels per day at an average price of $41.08 per barrel. The Company also entered into new crude oil swaps for January 2021 through December 2021, which hedge 1,000 barrels per day at an average price of $42.20 per barrel.

Company’s economic derivative hedge positions are with large financial institutions, which are not known to the Company to be in default on their derivative positions. The Company is exposed to credit risk to the extent of non-performance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate non-performance by such counterparties. None of the Company’s derivative instruments contain credit-risk related contingent features.